When you’ve decided to open your own business, there are seemingly endless decisions to make. One of the most important is the legal form your business will take. The choice you make can have a significant impact on your exposure to liability, but can have tax consequences as well. Here’s an overview of the common business structures, with some of the advantages and disadvantages.

Sole Proprietorships

If you are truly going into business for yourself, this can be the easiest and best choice. With a sole proprietorship, you don’t have to file organizational documents with the state. You may need a business license—not all businesses in Pennsylvania are required to have a license. In addition, if you plan to do business under an assumed name, you will need to file a Registration of Fictitious Name form.

With a sole proprietorship, you are personally responsible for the debts and obligations of the business, and your creditors can have access to your personal property to satisfy a business debt. The income from a sole proprietorship passes through as ordinary income on your personal tax return.

Partnerships

If there’s more than one person involved in the ownership of the business, you might choose to set up a general or limited partnership. In a general partnership, all partners are “jointly and severally” liable, meaning that each partner can be held individually responsible for the debts of the partnership, and that creditors can have access to personal property to settle a debt. In a limited partnership, the limited partners typically don’t have any liability beyond their investment in the enterprise. Partnership income is pass-through income, treated as ordinary income on your personal return.

Corporations

The principal benefit of the corporate structure is the limit it establishes on your potential liability. As a general rule, with a corporation, you are only liable for the amount of your investment. You can lose the entire investment, but the corporation’s creditors do not have access to your personal assets to satisfy debts of the business.

There are two types of corporations—S corporations and C corporations. S corporations, limited to a maximum of 100 shareholders, are treated much like partnerships when it comes to taxation—any income passes through to shareholders based on their ownership interest. With a C corporation, there’s “double taxation”—the corporation pays a tax and the shareholder also pays tax on distributions.

Limited Liability Companies (LLCs)

A limited liability company shares many traits with an S corporation. Tax treatment is the same, as is the protection from liability for the debts of the company. It’s typically easier to set up an LLC and there are fewer filing and recordkeeping requirements than for a corporation. In addition, there is no limit to the number of members you can have in a limited liability company.

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The Legal Requirements for a Valid Contract

When you’re operating a business, you’re constantly talking to customers, suppliers and others, inquiring about the availability of resources or seeking to sell goods or services. When are those conversations just that—preliminary discussions before the formation of a contract—and when do they rise to the level of an enforceable agreement? Here are the basic elements of a legally binding contract.

There Must Be an Agreement

Agreement assumes at least two parties (there’s really no upper limit on the number of parties to a contract) and it assumes that the parties have a mutual understanding of their rights and responsibilities. Under the law, that is known as offer and agreement. To be valid, an offer must be communicated to the other party, and the person making the offer must manifest an intention to be bound by the terms of the offer. The offer must also state specific or definite terms. As a general rule, acceptance must be communicated to the person making the offer—the exception is with unilateral contracts, where performance constitutes acceptance. An acceptance that changes the term of an offer is technically not an acceptance, but a rejection and counteroffer.

There Must Be Consideration

Consideration is a legal term that means “something of value.” Both parties to a contract must give consideration, either in the form of giving or doing something or refraining from doing something they have a right to do.

The Parties Must Have the Legal Capacity to Enter into a Contract

Essentially, this requirement ensures that both parties have the ability to understand that they are entering into a contract, and to understand the terms and obligations. Parties may lack capacity for a number of reasons:

Age—Persons under the age of 18 are considered under the law to lack the capacity to enter into a binding contract. Such a person may, however, ratify an existing contract after attaining the age of 18.

Intoxication—A person may lack capacity if under the influence of drugs or alcohol at the time the contract was signed

Mental incapacity—Mental illness, dementia or other afflictions that limit a person’s cognitive functions can make them incapable of entering into a contract.

The Parties Must Have Voluntarily Entered into the Agreement

The courts will not enforce a bargain where one of the parties did not knowingly and voluntarily agree to the terms. Accordingly, if there’s evidence of fraud or misrepresentation, duress or undue influence, the contract may not be valid.

The Subject Matter of the Contract Must Be Legal

The courts won’t enforce agreements for the performance of acts that violate laws, statutes or ordinances, or that are contrary to public policy.

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If you own or operate a business, you enter into contracts on a regular basis, perhaps many times every day. In this series of blogs, we’ll look at the elements of a valid and enforceable contract:

An agreement — There must be offer and acceptance

Consideration — Both parties must give something or promise to refrain from doing something they have a right to do

Capacity — Both parties must have the legal capacity to enter into the agreement

Volition — The parties must voluntarily agree to the terms of the contract

Legality — The subject matter must be legal

The Agreement

The first requirement of a valid and enforceable contract is that there must be an agreement. There must be at least two parties, but there’s no upper limit to the number of parties to a contract.

An agreement requires two things—an offer and an acceptance. Though there are certain types of contracts that must be in writing to be enforceable—we’ll address this in a later blog on the Statute of Frauds—most oral offers are sufficient and can be accepted orally, forming a binding contract. There are some situations where what appears to be an offer may not be an offer:

Where the offer is clearly made in jest — “I’ll pay you million dollars for that sandwich”.

Where the language is clearly exploratory — “Would you consider $500 for that guitar?”

Under contract law, the terms of the offer must be clear and definite, such that a reasonable person would know what his or her obligations would be under the agreement.

As a general rule, a valid offer remains open until revoked by the person making the offer. A counteroffer, though, legally revokes the original offer and becomes a new offer, with new terms. In addition, if the offer states a specific time within which it must be accepted, the offer is no longer valid once that period expires.

Acceptance of an Offer

To accept an offer, a person must clearly communicate acceptance of its terms and a willingness to be bound. A person cannot accept an offer that has been revoked. Acceptance can be made orally or in writing, unless the terms of the offer require a specific form of acceptance. Once the offer has been accepted, it cannot be revoked.

In most instances, in what is referred to as a bilateral contract, the person accepting the offer promises to abide by the terms of the offer. However, the law recognizes what is known as a “unilateral” contract, essentially the exchange of a promise for an act. A reward is the classic example of a unilateral contract—a promise of a payment of money for the return of a lost item is enforceable when the act is performed, and does not require any other form of acceptance of the offer.

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Blogs that Help You Understand Your Rights and Our Services

Welcome to the website of B&D Law Group, experienced business law attorneys in Chambersburg, Pennsylvania. At our firm, we understand the many legal issues that business owners face every day. Whether you’re just starting a new business venture or working hard to protect your bottom line, we have the skill, knowledge, experience and resources to swiftly and effectively answer your questions and resolve any concerns. We’ve protected the rights of businesses and business owners in the Chambersburg area for more than 55 years.

Our Business Law Practice

Business formation — we’ll help you evaluate the different types of business structures and set up the one that makes the most sense for you. We’ll prepare and file all documents necessary to comply with state laws, including articles of incorporation or organization, by-laws, corporate resolutions and tax registrations. We can help you set up a sole proprietorship, partnership, limited liability company or corporation.

Business agreements — We have extensive experience with all aspects of business contracts, from negotiation through execution. We will advise you regarding any type of commercial agreement, including vendor or customer contracts, employment agreements, confidentiality or non-disclosure agreements, licensing contracts, partnership or shareholder agreements and real estate contracts.

Business disputes — We protect businesses and business owners is all types of litigation, from breach of contract to unfair competition, from partnership disputes to employment disagreements.

We understand that a well-informed client is the best client. To that end, we’ll regularly post blogs on different aspects of business law, so that you can continually increase your knowledge and protect your interests.

Contact Our Experienced Business Law Attorneys

Send us an e-mail or call our office at (717) 264-5194 to schedule an appointment to discuss any legal issue affecting your business. Evening and weekend consultations are available upon request.